What the Disney/Fox deal aims to achieve

This is truly a landmark deal for Rupert Murdoch, the executive co-chairman of 21st Century Fox.

From a single newspaper in Adelaide, Mr Murdoch has spent the last 65 years assembling a global media empire, acquiring assets and boldly investing in start-ups such as Sky – the owner of Sky News.

The media industry has been stunned at his preparedness to unwind the work of a lifetime and to sell assets to which, in many cases, he is seen as being emotionally attached.
Yet this is a clear-sighted decision by the 86-year old billionaire. Mr Murdoch knows the biggest threat to media businesses like 21st Century Fox are not their traditional competitors from within the industry, such as Disney or Time Warner, but tech giants like Amazon, Google, Facebook, Apple and Netflix.
In selling to Disney, a company three times the size of 21st Century Fox and in which he and his family will maintain a stake, Mr Murdoch is calculating that the tables can be turned.

Image: Rupert Murdoch is married to Jerry Hall
That is because the Magic Kingdom, bulked up with Fox’s film and television assets, will be in a much stronger position in which to compete with so-called “over-the-top” streaming platforms, such as Amazon Prime and Netflix, which supply content direct to consumers instead of via traditional broadcasting networks.
Both Disney and Fox have already been gradually removing their film and television content from Netflix in particular.
The sharp drop in shares of Netflix since news leaked out that Disney and Fox were in negotiations shows who Wall Street thinks will be the big loser from this deal.
This will be crucial for Disney. The company, which owns the US broadcaster ABC, used to make around two-thirds of its revenues from television but “cord-cutting” – customers abandoning pay-television operators in favour of alternative internet services – has led to this falling to just under half of all sales.

Image: Netflix and Amazon’s Prime service are among the top challengers in the provision of entertainment
Disney is responding by launching its own streaming services and, with Fox’s television and filmed assets, it will become a powerful player. Fox’s 30% stake in Hulu, in which Disney also owns a 30% stake, will add to that muscle.
The deal will also enable Disney’s filmed entertainment arm to leapfrog Warner Brothers to become Hollywood’s leading player. The combined business will account for around two in every five cinema tickets sold in the US – giving Disney greater leverage over how much it can charge for its movies.
But there is also an important cultural angle to this in that the deal will make Disney’s film and TV offerings more rounded.
Fox’s television studios produce edgier, more adult-oriented shows, such as Family Guy, The Simpsons, Modern Family and This Is Us, than the more traditional family entertainment in which Disney’s TV arm specialises.

Image: The Star Wars franchise is part of Disney
The filmed entertainment arm of Fox, helped by units such as Fox Searchlight, its indie film arm, is widely admired in the industry for its creativity and output. When nominations for Hollywood’s Golden Globes were announced earlier this week, Fox had 27 film nominations, more than twice as many as its nearest competitor, Sony, while Disney had just three.
This deal will also make Disney, which is more focused on the United States, much more of an international media company.
Fox is presently the more geographically diverse of the pair. Disney’s theme park business, which accounts for 20% of its revenues, could also expect a boost from the addition of popular Fox franchises such as the X-Men.
Star TV in India and Sky, with its 22 million household customers in Britain, Ireland, Germany, Austria and Italy, are accordingly very important components of this deal for Disney.

Fox has spent the last year trying to buy the 61% of Sky that it does not already own and that takeover process will now continue. The deal is currently being scrutinised by the Competition & Markets Authority.

Image: Sky plc is the owner of Sky News
This transaction is the biggest roll of the dice yet by Bob Iger, Disney’s highly-respected chief executive, who since taking the job in 2005 has bought a number of businesses, including Pixar for $7.4bn, Marvel for $4.2bn and LucasFilm for $4.1bn. All of those properties were successfully integrated into Disney and Wall Street is betting Mr Iger can pull off the trick again.
The rest of the global media industry’s major players will have to look to their own positions after this deal, which raises the prospect of a handful of giants – Comcast, owner of NBC Universal; the combined Disney and Fox, and AT&T, assuming it is allowed to buy Time Warner – dominating the sector.
This transaction may force the likes of CBS and Sony into doing mergers of their own.
Following the deal, 21st Century Fox’s remaining assets will be in news and sports, including the Fox News and Fox Business News channels as well as Fox Sports 1 and a number of local US TV stations.

Image: Bob Iger plans to stay at Disney’s helm until at least 2021
Mr Murdoch regards news and sport as being less exposed to a downturn in advertising because they tend to be watched by audiences in real time. He has also noted how CBS, the US broadcaster, was rewarded with a higher stock market rating by Wall Street once it was separated from the media conglomerate Viacom to become a more focused business.
The “New Fox” will still be a sizeable business, generating free cash flow of $2bn annually, putting it in a strong position to acquire other assets should Mr Murdoch wish to do so.
There has been speculation that, following a sale to Disney, Mr Murdoch would seek to reunite Fox with News Corporation, the owner of newspaper titles such as the Wall Street Journal, The Sun and The Times, from which it was demerged four years ago.
Mr Murdoch and his family trust are the biggest shareholders in both companies and the main reason why Fox’s proposed £18bn takeover of Sky has taken so long to complete is because the UK government and Ofcom, the UK broadcasting regulator, have questioned whether placing Sky News and News Corp’s British newspaper titles under common ownership would reduce plurality in the UK news industry.
Yet Mr Murdoch has no plans to reunite the two arms of his business empire, reasoning that most outside investors want exposure to either 21st Century Fox or to News Corporation, but not to both.
One big question is what will happen to James Murdoch, Mr Murdoch’s younger son, who is chairman of Sky and chief executive of 21st Century Fox.
There had been speculation that Fox had been pressing for a seat on the Disney board for him, putting him in place to eventually succeed Mr Iger, who was due to retire in July 2019.
But there will be no boardroom representation. Mr Murdoch is, however, expected to play a key role in the integration process – giving him the opportunity to impress at Disney.

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As for Mr Murdoch Sr, there has been speculation that he will use this deal as an opportunity to retire, as his friend Frank Lowy, the billionaire founder of the Westfield shopping empire, plans to following the sale of his business this week.
That is not going to happen. Mr Murdoch is excited about prospects for “New Fox” and has even been telling colleagues this is a chance to “start all over again”. Do not be surprised if, for example, he announces plans to take Fox News into new markets.